Steady grip

Rising raw material cost, higher capex plan, exposure to IL&FS and discontent among shareholders over spiralling remuneration of top executives has pushed the Apollo Tyres’ stock to a 52-week low of Rs.195. Reports of minority shareholders voting against the reappointment of Neeraj Kanwar, vice-chairman and managing director, due to high remuneration, triggered a steep fall of 11% on September 28 and since then the stock has continued to slide.

As the stock lost ground, patriarch Onkar Kanwar, chairman of Apollo Tyres, has scaled up his stake in the company. Kanwar-led promoter entities Classic Auto Tubes and PTL Enterprises have bought 1,915,000 shares worth Rs.438 million through September and October. As per the June 2018 disclosure, promoters held 40.39% in the company. Even in FY18, the promoters had acquired shares worth Rs 4.35 billion from the open market after reducing their stake through a block deal in May 2017. Despite the buying spree, overall promoter holding had moved down from 44.15% in June 2017 to 40.32% in March 2018.

Before input cost pressure and rising remuneration derailed the stock price, the company had reported decent numbers in the June quarter. The company’s net profit jumped 185.17% (year-on-year) in Q1FY19 largely aided by a low base of Rs.880 million in June 2017. Ebitda also grew 92% year-on-year and 3% quarter-on-quarter to Rs.5.3 billion on the back of higher-than-expected sales volume. Net sales increased by 21% to 42.49 billion in Q1FY19 from Rs.35.12 billion in Q1FY18. But total expenditure also rose 15.26% to Rs 37.59 billion in June 2018 from Rs 32.62 billion in June 2017 driven by 28.28% and 18.70% rise in operating and manufacturing expense and raw material cost respectively.

However, analysts continue to be bullish. Acknowledging that cost pressure will adversely affect profitability, Kotak Institutional Equities predicts that the impact on standalone margin will be mitigated by strong volume growth due to market share gain, decline in natural rubber prices in rupee terms and price increases of 2-4% effected over the past three months. Looking ahead, Reliance Securities also expects the company’s performance to improve owing to steady ramp-up in Hungarian operations and strategic shift to OEM segment. “We expect better margins with regular price hike and increasing utilisation at European operation,” mentions their report.

In tune, mutual funds have increased their holding from 10.56% in June 2017 to 19.84% in June 2018. HDFC MF has led the way increasing its stake from 0.65% to 4.76% in the same period. DSP MF has also doubled its stake from 1.27% to 2.72% over the past four quarters. However, Franklin Templeton MF has reduced its stake from 3.61% to 2.63%. Foreign investors, too, have reduced their stake from 26.72% in June 2017 to 22.96% in June 2018. Here, again, Franklin Templeton Investment Funds has sold down from 5.32% in September 2017 to 4.43% in June 2018.